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Britain’s central bank could inch closer to its first cut in interest rates since the start of the pandemic today.
The Bank of England is widely expected to leave interest rates on hold at its latest monetary policy committee (MPC) meeting. But the MPC may also give hints about how soon it will start to lower rates from their current 16-year high of 5.25%.
As inflation dropped to 3.2% in March, nearer the Bank’s 2% target, policymakers can have some hope that price pressures are easing; headline inflation is expected to soon fall below 2%.But wage growth – last clocked at 6% year on year – appears to be too high for the Bank’s comfort.
The BoE will release its latest economic forecasts at noon, alongside the interest rate decision, followed by a press conference 30 minutes later.
This morning, the money markets suggest there’s just a 5% chance of an interest rate cut today, with a 95% likelihood that the MPC leaves rates on hold.
But today’s decision may not be unanimous. At the last meeting, in March, the MPC voted by a majority of 8–1 to maintain Bank rate at 5.25%; could a second dove join policymaker Swati Dhingra and vote for a cut?
Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management, argues that the Bank should look through short-term dip in inflation and not cut rates today.
Ward explains:“With real wages returning to positive growth, the economy appears to be gaining momentum. That means the current dip in inflation we’re seeing is likely temporary, with a possible resurgence on the cards for the second half of the year.
“By late summer, the Bank of England may have more evidence of easing underlying pressures. However, for now, I think it should communicate that its target is medium-term and, just as it looked through 10% headline inflation, it should also look through a short-term dip in inflation.”
Looking further ahead, the money markets currently expect the Bank’s first cut to come by August, with a second likely in November or December.
But some City economists believe the Bank could cut rates as soon as June.
Kathleen Brooks, the research director at XTB, says: "The market is expecting the first rate cut from the BOE between June and August. If the BOE does intend to cut rates next month, then we would expect to get a clear indication from the Bank on Thursday that this could happen."
Conversely, if the Bank pours cold water on a June rate cut, the market could be disappointed, sterling may rally, and UK Gilt yields could rise, Brooks adds.
The Bank’spolicymakers do appear split on when to cut rates, judging by their recent comments.
Last month, deputy governor Dave Ramsden declared that he has become “more confident” that domestic inflation pressures are receding. Ramsden argued that UK inflation could hold around the Bank of England’s 2% target for the next three years, rather than rising at the end of this year as the Bank had expected.
Governor Andrew Bailey predicted “quite a strong drop” in the next inflation reading.But other policymakers have sounded more cautious.
Huw Pill, the chief economist, argued in April that “the time for cutting bank rate remains some way off.”
And external policymaker Megan Greene has said that the UK wage growth and services inflation “just aren’t consistent” with keeping inflation sustainably at the 2% target.
Reuters has more details here.
The agenda
• 11am BST: Ireland’s inflation data for April
• Noon BST: Bank of England interest rate decision
• 12.30pm BST: Bank of England press conference
• 5.15pm BST: Virtual Q&A with Bank of England chief economist Huw Pill
We’ll be tracking all the main events throughout the day ...
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